Skip to main content

Close-out Amount differs radically from Market Quotation and Loss



United Kingdom

The English Court of Appeal issued a judgement on 14 March 2013 in the case of Lehman Brothers International (Europe) v Lehman Brothers Finance SA EWCA Civ 188. The judgement can be viewed here

The appeal related to an earlier decision of Mr Justice Briggs which was a subject of another briefing we issued at the time.  The Court of Appeal have reversed that earlier decision.

The critical issue was whether the "value clean" approach (which is now firmly established as applying to the Market Quotation and Loss measures under the 1992 ISDA Master Agreement) applies to the Close-out Amount measure under the 2002 ISDA Master Agreement. The Court of Appeal decided that it did not. This means that, when a Terminated Transaction is to be valued upon close-out under a 2002 ISDA Master Agreement there is no requirement to assume that the replacement transaction would continue to maturity, so that the economic effect of termination rights must be taken into account.

The court specifically held that the effect of the decisions in Peregrine Fixed Income Ltd v Robinson Department Store Public Co Ltd CLC 1328 and Australia & New Zealand Banking Group Ltd v Société Générale CLC 833 had been reversed by the 2002 Close-out Amount definition so that replacement transactions should reflect the creditworthiness of the party seeking any quotations and so that any option rights would be included as part of the valuation.

The court also held that any terms of a transaction which impact on pricing would be material terms for the purposes of the Close-out Amount definition and so should form part of the valuation on termination.

If you would like to know more about the case and its implications, we would be pleased to hear from you.

This firm advised LBF on both the original proceedings and on the appeal. It is not yet known if there will be a further appeal.